How do deposit replacement schemes work? [+ free fact sheet for tenants]

12 June 2019

Deposit replacement schemes are becoming increasingly popular - but how do they actually work? We've put together a guide to the pros and cons of deposit replacement schemes for tenants, landlords and letting agents - plus you can download a free fact sheet to share with your tenants.

Deposit replacement schemes are becoming increasingly popular with both letting agents, landlords and tenants alike - especially in light of the ongoing cost of living crisis.

"If you’re locking up your money for two or three years you only get back what you put in, so in reality with inflation you are actually losing money having it sit there in an account," says Gary Wright, co-CEO of Flatfair. "So the differential is moving towards cash alternatives all the time.”

This guide covers:

How do deposit replacement schemes work?

In a nutshell, deposit replacement schemes are services taken out by either tenants or letting agents to provide protection to the landlord against any potential breaches of the tenancy agreement. In most cases the tenant pays a non-refundable fee instead of a traditional deposit of five or six weeks’ rent.

The product then provides the landlord with the protection equivalent/more to a traditional deposit, should any costs not be recovered from the tenant.

Tenants who choose to pay for a deposit replacement scheme will still be fully responsible for paying rent and fulfilling the terms of the tenancy agreement.

We’ve put together a quick guide to the pros and cons of deposit replacement schemes for tenants, landlords and letting agents.

What are the pros and cons for tenants?

  • Tenants pay a non-refundable fee instead of a traditional, refundable deposit of five or six weeks’ rent, which means securing a new property has less impact on their immediate cash flow.
  • They are liable for any unpaid rent or damage to the property (allowing for fair wear and tear). Any costs that tenants are liable for would be calculated at the end of the tenancy.
  • Some deposit replacement schemes may charge a yearly renewal fee and others are chargeable monthly, so depending on your expected tenure within the property,  it’s important to be aware that they could sometimes cost more than a traditional deposit.
  • Tenants should always be given a choice between a traditional deposit and a deposit replacement service.

Download a free fact sheet to share with your tenants on deposit replacement  schemes

What are the pros and cons for landlords?

  • Deposit replacement schemes usually give landlords more weeks of protection against unpaid rent and dilapidations than a traditional tenancy deposit, which is capped at five or six weeks’ rent under the Tenant Fees Act.
  • Tenants who choose a deposit replacement scheme have increased liability to comply with their tenancy agreement.
  • Deposit replacement schemes aim to reduce the claim time compared to a traditional deposit registration scheme.
  • Deposit replacement schemes could also help to reduce void periods, because they reduce the upfront costs for potential tenants to secure a property.

Download your free legislation e-book - with bonus audiobook and Renters'  Reform Bill e-book

What are the pros and cons for letting agents?

  • Letting agents can offer their landlords more protection with a deposit replacement scheme than a traditional capped deposit, while reducing the total move-in costs for their tenants.
  • They’ll also reduce their administration time as they won’t need to lodge new deposits in a client money protection scheme and they could even let their properties faster - according to Flatfair, letting agents who offer alternative deposit options let their properties 25% faster than those who don’t.
  • Deposit replacement schemes also offers lettings agents a new revenue stream whilst delivering a service that mutually benefits the tenant and landlord.
  • It is vitally important that as a letting agent you give prospective tenants the choice between a deposit replacement scheme and a traditional deposit. Tenants must choose the solution that is right for them and be supplied the relevant information to make an informed decision.

Are people using deposit replacement schemes?

Traditional deposits are still the preferred method by some majority, however the amount of people choosing deposit replacement services is growing.

Along with new and innovative products, the growth of this sector comes down to engagement and education of both landlords and tenants.

There are a number of reasons why tenants are taking up the service -from the ability to reduce the pressure on the initial monthly bills, releasing a previous traditional deposit and utilising it to furnish the property to just wanting to keep their money in their bank account - and the demographic of tenants choosing deposit replacement schemes is broad.

Want the latest lettings new delivered straight to your inbox every week? Sign up to our mailing list and stay up to date, and read our complete guide to lettings legislation in the private rented sector to help your agency stay compliant.

Further reading